Alcohol Prohibition and Pricing at the Pump*

Abstract

Firms often sell a transparent base product and a valuable add‐on. If only some consumers are aware of the latter, the add‐on's effect on the base product's price will be ambiguous. Cross‐subsidization between products to bait uninformed consumers might lower, intrinsic utility from the add‐on for informed consumers might raise the price. We study this trade‐off in the gasoline market by exploiting an alcohol sales prohibition at stations as an exogenous shifter of add‐on availability. Gasoline margins drop by 5% during the prohibition. The effect is mediated by shop variety and competition. Using traffic data, we unveil sizeable consumer‐side reactions.